22 February 2017

Surging Steel Price Boosts Scrap Value of Redundant Containerships

A sharp increase in steel prices has prompted
a new wave of vessel scrapping, bringing the supply-demand ratio in container
shipping further into balance.

According to the latest report from London
shipbroker Braemar ACM, containership scrapping this year has already reached
56, amounting to 185,500 teu. This compares with 16 ships (45,000 teu) in the
same period of 2016.

Moreover, the delivery of newbuild tonnage
has slowed considerably, with only 18 vessels, totalling 91,500 teu, having
been delivered so far this year.

Over 2016, there were 189 demolitions
(658,000 teu), according to Braemar – a new record for the container industry.

The latest driving force is twofold: plenty
of surplus tonnage, particularly in a panamax sector the industry would do well
be get rid of, and steel prices have firmed significantly since the low point
of 2016.

By 6 February, the idle containership fleet
had swelled to 342 ships (1.32m teu), according to Alphaliner data, with liner
voyages blanked and ad-hoc demand disappearing during the Chinese new year
holiday.

This included 47 classic panamax vessels
seeking employment in a charter market where daily hire rates have collapsed to
only $4,250-$5,000 – below operating cost.

Of these vessels, Alphaliner notes, 30 are
currently hot or cold lay-up, mainly at anchorages in South-east Asia, and
their owners may now opt to cash in on an increased demand for steel scrap.

Braemar reports that the demolition market
“remains firm” and had heard of one panamax vessel being negotiated at “excess
$330/LDT basis as is Singapore”.

Steel commodity prices fell to an all-time
low of $90 per tonne in March last year, before bouncing back in June to around
$300 per tonne and remaining at that level for the rest of 2016.

Analysts are forecasting that steel prices
could rise above $400 per tonne this year, and even higher in 2018, as demand
begins to exceed supply.

This is a direct consequence of the world’s
leading steel producer, China, reducing its production by around 20% by 2020,
due to a depression in its construction activity linked to the nation’s
economic slowdown.

Against this backdrop, the World Steel
Association has predicted that demand globally will increase by 0.4% this year,
including 5.9% growth in the US, thus resetting the supply-demand balance and
pushing prices up.

Indeed, the increased price of steel has
already had an impact on the container manufacturing industry, with
market-leading lessor Textainer reporting last week that a steel price hike of
some 80% in the past year was supporting new dry container prices of “above
$2,000”.

The surge in steel prices is likely to also
put an end to cheap ships if, and when, any new orders are negotiated, but the
more immediate relevance is that with the scrapping option becoming more
attractive to owners, the chronic over-tonnage that has blighted the charter
market in the past few years could be over rather sooner than anticipated.